Smart Energy Living - January 2012

The New Face of Residential Solar:

By: Leslie Martel Baer

The financial equation for home solar systems for customers of Colorado’s largest utility is changing substantially. In March 2011, Xcel Energy began shifting its Solar*Rewards program from rebates based on the size of the installed system to incentives which instead pay system owners for the electricity generated.

This shift impacts the return over the life of PV systems as well as their installation costs. While the 30% federal tax credit on PV systems runs through the end of 2016, the Solar*Rewards incentives available to Colorado’s Xcel customers will continue to change .

The table below shows the effects of changing from up-front incentives (UFIs) to performance-based incentives (PBIs):

How the new system affects owner costs

Using the pre-incentive price estimate of $5.25 per Watt (W) installed for small (< 10 kW) residential systems that we calculated in September, the table at right illustrates Xcel’s current “Step 2” for a homeowner owned 5kW system in Denver.

While the system will cost $5,250 more than under the pre-March 2011 UFI-only program, it will generate $7,128 in PBIs (also called renewable energy credits or RECs) over 10 years. In addition, assuming a grid-tied net-metering setup, it will provide $7,946 in electricity savings over 10 years at today’s rates.

An Investment with Risk and Reward

Residential solar PV is an investment and carries the potential for risk and reward—which depend upon future factors about which we can only hypothesize, as illustrated in the table below. The economic viability of a system depends largely upon which Solar*Rewards Step a participant purchases under and how much Xcel Energy’s electricity prices change.

These calculations assume that the program will remain as described, assume fixed PV installation costs over the three Steps and do not factor in the time value of money.

Why the Shift to PBIs?

Steps 2 and 4 do offer consumers a slight advantage over the UFI only program, which would have yielded a 0% return at 10 years with a 10-year payback on the 5 kW system. However, as Dan Yechout of Namasté Solar points out, the time value of money makes the new structure less desirable for consumers: it is best to get money sooner rather than later.

Xcel Energy has clear motivations for the changes. Solar*Rewards was running a deficit; by paying incentives over time, Xcel evens out the program’s cash flow. Further, as Jaclyn Webb of Xcel Energy explained, the program now incentivizes systems that generate. Because ratepayers fund these incentives through a 2% electricity charge, Xcel must bring online the program’s required number of MW of solar generating capacity and ensure that capacity is generating electricity.
PBIs motivate installers and owners to produce high-quality installations and maintain them. Such systems are more likely to meet their production estimates, ensuring that the system owner is seeing the desired revenue stream.

As these PBIs provide a contracted revenue stream, some industry observers believe more financing will be available: a reliable income can be used to pay down loans. In practice, commercial firms leasing systems to homeowners may be seeing the availability of such capital, but installers are not yet seeing this opportunity for homeowners.

The Consumer’s Best Bet

For some homeowners, buying a system makes sense. The 3.4% increase in electricity price—approximately Xcel’s 10-year estimate—is a conservative assumption. Therefore, for homeowners looking to make a $15,000 investment who have no need to receive more than the 10.3% 10-year rate of return (about a 1% annual return), self-ownership is a reasonable choice and offers a hedge against even higher electricity costs.

However, a loan may not make sense: the fees and interest rate reduce the rate of return. A leased system may be more economical: the leasing company finances the system and receives the REC. Homeowner typically see a modest reduction in utility bills. With little or no obligation to monitor or maintain the system, leasing allows those without cash to access the benefits of PV.

Finally, consider other technologies. Energy efficiency, solar thermal, geoexchange or other technologies may offer a more sensible investment today, and might make your home more “PV ready” tomorrow.